Media Clipping — June 17, 2007, The Chronicle-Herald

We depend on GDP, but it has its flaws

By Alex Roberts

THE GDP is the broadest and most widely used measure of national economic activity and well-being.

Indeed, when economists or news people refer to the economy, they are generally referring to the gross national product. So, when a recent national newspaper headline noted, "The Canadian economy grew by 3.7 per cent for the first quarter of 2007," it means that the GDP grew by 3.7 per cent, compared with the previous year's GDP.

The concept of GDP was first developed in the 1930s. It is based on research by Russian-born economist Simon Kuznets, who won the 1971 Nobel Prize for his work in standardizing this measurement.

Since the 1940s, the GDP has been used by governments and policy-makers to guide their economic decision-making. Even the World Bank uses the GDP as one of its key criteria for providing economic aid to member countries.

GDP is usually defined as the total dollar value of all the goods and services produced in a country during a specified time period. Canadian GDP figures are reported monthly by Statistics Canada, with quarterly and annual summaries. It is also worth noting that the GDP data is subject to several revisions before the final figure is settled upon.

The basic job of the GDP is to measure the performance of the economy — whether it is expanding or contracting as compared with the previous quarter or year. Thus, the important number to look for is the growth rate of the GDP.

Typically, the Canadian economy grows two to four per cent a year, a range most mainstream economists agree represents a sustainable long-range growth rate. Growth rates outside this range can often have significant effects on government policies and even send ripples through the stock market and financial community.

The GDP figures are generally reported in two ways: current and constant dollars. Current dollar GDP uses today's dollars and thus tends to exaggerate actual growth because of the effects of inflation.

In order to compensate for the effects of price increases, GDP is also reported in constant or real dollars. Simply put, the GDP is deflated to eliminate the effects of inflation and reported in standard dollars from a common base year.

(Statistics Canada uses 1997 as its base year.)

While a growing GDP remains the chief object of veneration in most so-called market economies and is the one statistic that tells policy-makers how the overall economy is doing, it is not without its critics. In fact, notable Canadian economist John Kenneth Galbraith saw the GDP as one of the "lingering fallacies of American capitalism," referring to it as "one of our socially most widespread forms of fraud."

Even Mr. Kuznets, the inventor of the GDP, forewarned the U.S. Congress in the 1930s of the inherent flaws and weaknesses of GDP figures. Among other things, he stated that "the welfare of a nation can scarcely be inferred from a measure of national income as defined by the GDP."

Many critics of the GDP are quick to point out that it doesn't even count the value of all the goods and services produced in the economy. Housework, unpaid child care and the work of amateur carpenters, for example, take place outside the marketplace, so they are not included in GDP.

Excluding these activities is not only gender-biased, but means that the GDP understates output and living standards.

Other fault-finders point to the underground economy as being a significant flaw in GDP calculations. Illegal activities, such as smuggling or drug dealing and under-the-table transactions paid for by cash or barter are also left out of the GDP. Some economists have estimated the size of the Canadian underground economy at about 15 to 20 per cent of GDP.

Finally, the GDP has no debit side to its calculation to take into account such negatives as resource depletion, pollution or wars.

Indeed, the crime wave Halifax is now experiencing actually increases the GDP because of additional spending on policing, lawyers and prison facilities.

Marilyn Waring, an internationally recognized spokeswoman for global feminist economics, put it best when she pointed to the wreck of the oil tanker Exxon Valdez in 1989 as "the single most fantastically productive voyage of an ocean tanker of all time."

About $2 billion US was spent on the cleanup, plus $2.5 billion in legal bills, pushing the GSP (Gross State Product) of Alaska to unprecedented levels, despite blighting the Alaskan coast.

Economists are now looking at more comprehensive ways of measuring well-being, with the idea of producing a Genuine Progress Indicator.

This measure includes not only GDP, but also factors in leisure time and life expectancy, for example, and subtracts for pollution, overcrowding and other issues.

Perhaps the last word on the GDP belongs to the tiny country of Bhutan, which has rejected the idea of the GDP altogether.

Instead it has built its economy around Buddhist spiritual values and produces an index of well-being known as Gross National Happiness, which among other things, emphasizes green technologies.

Alex Roberts is a Halifax-based freelance writer, educational speaker and former economics educator. This is the first in a series of articles discussing, decoding and demystifying a selection of the most important economic indicators. The series begins with what has been described as "the most famous statistic of them all," the gross domestic product.

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